Dollar Edges Lower; Second Virus Wave Prompts Caution

The dollar edged marginally lower in early European trade Friday, but the continuing rise of new Covid-19 cases throughout Europe and the U.S. is making traders nervous of buying riskier currencies despite the positive news of  a potential vaccine.

At 3:55 AM ET (0755 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, was down 0.1% at 92.898. GBP/USD rose 0.3% to 1.3155, USD/JPY fell 0.1% to 105.00, while the risk sensitive AUD/USD rose 0.1% to 0.7233.

In Europe and the United States, a second wave of infections has prompted the re-imposition of restrictions to stop the virus’ spread. This has prompted caution within the foreign exchange markets despite a slew of positive news during the week of potential Covid vaccines.

Pfizer (NYSE:PFE) and BioNTech (NASDAQ:BNTX) announced strong results for their vaccine candidate on Monday, while Moderna (NASDAQ:MRNA) said it expected to make an announcement on its vaccine’s efficacy by the end of the month.

“The big risk rally has lost some steam but failed to convert this into any market correction. In FX this has been mirrored by a halt in the dollar decline while high-beta currencies have largely held on to early-week gains,” said ING analyst Francesco Pesole, in a research note.

“The background story for markets remains the contrast between vaccine-related hopes and sharply rising infections, while investors stay on the lookout for more hints from Presiden-elect Biden around his plans for virus response, fiscal stimulus and foreign policy.”

EUR/USD rose 0.1% to 1.1814, ahead of the latest eurozone growth numbers later in the session, after the ‘flash’ release showed seasonally adjusted GDP increased by 12.7% in the euro area and by 12.1% in the EU, compared with the previous quarter.

However, the markets will likely discount any good news given the new restrictions across the continent suggest a double-dip recession is now likely.

The European Central Bank is widely expected to add more stimulus at its meeting in December, and President Christine Lagarde cautioned Thursday about expecting too much from a potential vaccine.

“From a huge river of uncertainty, we see the other side now,” Lagarde said. “But I don’t want to be exuberant about this vaccination because there is still uncertainty” about production and distribution issues.

Elsewhere, Sterling was lifted by the departure of two hard-line Brexiteers from Prime Minister Boris Johnson’s inner circle, with senior adviser Dominic Cummings telling the BBC he expected to leave his job by the end of the year. Johnson’s director of communications Lee Cain has also left his job this week after a power struggle. The departures arguably reduce the risk of the U.K. pursuing a radical break with the EU at the end of the post-Brexit transition period at the end of the year.